The worst part of every buy-side interview, and how to survive it

It's that time of year again. Under-performing teams get blown out and disappointing analysts get let go to make room for new additions. Buy-side hiring season has begun!

But interviewing on the buy-side is not easy: sell-side interviews are a walk in the park by comparison.

What makes interviewing on the buy-side so tough? It's this: on the buy-side you're measured on the only metric that matters - can you make money? In a buy-side interview, they're going to determine your ability to make money through stock pitches. At a hedge fund, you're going to be judged on what you like (longs) and what you don't (shorts).

Your pitches can't be too consensus, or else you seem lazy. But if they're out of consensus, you better have really good data to support your thesis.

To make the process even more difficult, you're not just pitching to one person. Buy-siders are always asking for the views of others to make sure they're not missing anything. The same is true during the interview process, so you'll meet with many analysts and PMs before getting that final offer. This makes it so much harder because they all have so much more experience than you understanding the markets and stocks, and they're all looking to poke holes in your thesis.

On top of all this, what makes stock pitches hell is the fact that there's no clear right or wrong answer. I used to be an engineer before I got into finance. Engineering interview questions are straightforward. Either you know how to code or you don't. Either you know the solution to the problem, or you don't. But showing that you can make money is much more ambiguous. As a stock picker, if you can get it consistently right 60% of the time, you're a rock star. Think about that. In what other industry can you be wrong 40% of the time and not get fired, let alone be considered awesome?

What's in a good stock pitch?

Whatever you do, don't pick a well known large cap name for your stock pick. These names are covered by 30+ analysts, so you won't have any edge when it comes to research. It's better to focus on smaller names (but not too small, or else it won't be actionable) because the less familiar your interviewer is with the name, the fewer tough questions you'll get.

Remember, the goal of the stock pitch is to convey to the interviewer that you understand how the market works, how to identify mis-priced stocks, and that you're a good investor. If possible, try to include a Sum of the Parts (SOTP) or regression analysis. Not only does it sound smart, it also shows you've done the work.

What to do when your stock pitch goes horribly wrong?

Some hedge funds like to put you through multiple interviews over a long period of time. This creates the potential for your earlier stock pitches to be proven wrong. Like I said before, it's not easy to be right. Even if you have the right call, your timing can be off.

If your pitch goes awry, the best thing to do is own it. Because when you have P&L, you won't be able to walk away from a big loss. It's good to talk through what you missed or why you didn't see it coming. We all make mistakes. Nobody wants to work with somebody that isn't willing to take responsibility, especially when it directly impacts comp.

Good luck.

Margin of Saving was created by an analyst at a multi-billion dollar hedge fund to help others learn how to invest and save.

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